10/04/2002 @ 12:00PM

Excellence Sought--And Found

The rap on
Tom
Peters
Tom Peters
is that he’s a showboat, that he travels the lecture circuit offering banal certitudes, and that none of his later books have lived up to the promise of his first book, In Search of Excellence, the runaway bestseller he wrote with
Robert H.
Waterman
Robert H. Waterman
.

Some say Peters contradicts himself, that he’s a lightweight or he’s a crackpot. Others blame him for giving birth to the business-guru phenomenon and damn him for the sins of gurus who followed in his wake.

But whatever can be said about Peters, one remarkable fact about In Search of Excellence remains: Its list of companies have held up quite well over time. The book, which our panel of experts recently voted the most influential business title in the last 20 years, focuses on 43 “excellent” companies. The list contains just a few arguably embarrassing picks,
Atari
and
Wang Labs
being the most prominent. But overall, the companies Peters and Waterman called excellent have easily outperformed the market averages any way you slice it.

In Search of Excellence didn’t name the biggest companies and ride with winners: In 1982, when the book was published, just three of the 43 companies ranked among the top 25 by sales on The Forbes 500s. And just 22 of the 32 public companies were among the 500 largest. Those 22 ranked, on average, 125th on The Forbes 500s by sales.

Over the years, the companies grew. By 2002, 24 of the firms were among the largest 500 public companies, with an average Forbes 500s sales rank of 99.

The authors picked big companies considered “innovative and excellent” in a variety of industries that had shown strong growth and profitability between 1961 and 1980. The book doesn’t purport to be an investment guide, but investing in these excellent companies would have been a very wise choice both in the short run and the long run.

Over a five-, 10- or 20-year period, the Excellence index–an unweighted basket of the 32 public companies among Peter’s and Waterman’s 43–substantially outperformed the Dow Jones Industrial Average and the broader S&P 500. Since October 1982, when the book was published, the companies on the authors’ list earned an average total return of 1,305%, or 14.1% annually. This return outdistanced the DJIA companies, which earned an average annual return of 11.3%, and the S&P, whose companies earned an average annual return of 10.1%. (Click here for a complete list of the “excellent” companies and their performance over the last 20 years.)

Excellent? Totally
*Excellence Index is based on 32 public companies listed in ‘In Search of Excellence’ by Thomas Peters and Robert H. Waterman (Harper & Row, 1982); the average returns are unweighted by company market capitalization. Source: FactSet Research Systems

1982-1987 Total Return (%)

1982-1992 Total Return (%)

1982-2002 Total Return (%)

20-Year Annualized Return (%)

Excellence Index*

Average Return

251.32%

400.50%

1305.32%

14.1%

Median Return

219.97

331.79

898.45

12.2

DJIA

190.74

258.51

755.04

11.3

S&P 500

168.37

241.31

581.27

10.1

In other words, if you invested $10,000 in the Excellence index 20 years ago and then did nothing at all, you would have $140,050. An equal investment in the Dow would have yielded just $85,500.

The Excellence index gets a boost from star performers such as
Wal-Mart Stores
and
Intel
. But its median company performance also easily bests the averages for each of the five-, 10- and 20-year periods.

Some might assume it easy to pick 30 or 40 companies that would outperform the Dow. But precious few mutual fund managers do it–even though that’s their job and they can change their mix of companies at will.

Several of the companies selected by Peters and Waterman grew spectacularly. In 1982, Wal-Mart, for instance, was No. 259 on The Forbes 500s (ranked by sales). It is now ranked first.
Merck
was ranked No. 220; it’s now ranked 23rd.
McDonald’s
went from No. 263 to No. 128. Other companies, of course, lost their rankings, either because they merged with other firms (such as Amdahl, Raychem and Digital Equipment) or–in rare cases–because they shrank and went bankrupt (Wang Labs).

But overall, excellence won out.

More From Forbes

The Excellence Index Vs. The Averages
*Excellence Index is based on 32 public companies listed in ‘In Search of Excellence’ by Thomas Peters and Robert H. Waterman (Harper & Row, 1982); the average returns are unweighted by company market capitalization. **Amdahl, Amoco, Data General, Digital Equipment and Raychem all were merged into other companies; Wang Labs declared bankruptcy in 1992. Source: FactSet Research Systems